Some Fear Brazil`s Boom May Go Bust

January 08, 1986|By New York Times News Service.

RIO DE JANEIRO — Without resolving the foreign debt crisis that first tripped its economy, Brazil has suddenly emerged from its worst recession in recent memory, recording 7.4 percent growth last year, its best performance since 1976.

With most of the growth coming in the second half of the year, the speed of the recovery has caught even the government by surprise, while producers and consumers have rushed to catch up on time lost since the slump began five years ago.

Industries that had been working at 70 percent capacity are now producing at full steam and have helped to create 1.5 million jobs in the last 12 months.

The increased purchasing power of the middle class was mirrored in a wild year-end spending spree that left many shops without stocks by Christmas Eve. The new civilian government of President Jose Sarney is predictably delighted, believing that its decision to ignore the International Monetary Fund`s calls for austerity has been fully vindicated by the country`s resumption of its traditional growth.

``Brazil has conquered pessimism and inertness, doubts and despondency, tragedy and despair,`` Sarney said in a year-end message to the nation.

``Today, there is multiplied confidence and reason for optimism.``

Yet, paradoxically, beneath the euphoria of recent months, a continuing feeling of uncertainty about Brazil`s economic future lives on among some officials and many bankers and businessmen. In this boom, they fear, the ingredients for a bust may already be visible.

The darkest cloud remains inflation, which reached a record 233.7 percent last year. The government has argued that this was only slightly higher than in 1983 and 1984, with the difference that it was accompanied by growth.

Officials also point to recent tax reforms and budget cuts as evidence of their determination to bring inflation down to 160 percent this year, even if this means slower growth.

But, with prices jumping by 13.4 percent last month and expected to rise by more than 15 percent this month, many economists are already predicting a dramatically higher inflation rate for 1986.

``There are obviously many variables, but you`re beginning to hear numbers like 300 percent or even 500 percent,`` one said. ``No one can live with that.``

At the same time, while a $12.4 billion trade surplus last year enabled Brazil to keep up interest payments on its $104 billion foreign debt, the largest in the developing world, the Sarney administration has still to complete a long-awaited debt restructuring with the country`s commercial creditors.

Even with a looming deadline of Jan. 17 for the renewal of some $16 billion in interbank and trade credits, Brazilian officials and

representatives of a 14-bank advisory committee have made little progress in recent talks that were marked, according to sources on both sides of the table, by irascibility and distrust.

While refusing to involve the IMF, Brazil has sought rescheduling of principal due in 1985 and 1986 under conditions similar to those granted to countries that have accepted fund ``adjustment`` programs. But the banks are reluctant to make such concessions as lowering their ``spreads,`` or profit margins, without first seeking IMF approval of Brazil`s economic policies.

Souring the mood of negotiations, Brazil also at first refused to guarantee $455 million owed abroad by three local banks that went into forced receivership last November. And while Brazil has since agreed to cover 50 percent of this debt, the sources said many banks are demanding full compensation as the price of cooperating with the debt restructuring.

Brazilian officials and foreign bankers now seem doubtful that a full-scale rescheduling can be completed by Jan. 17 and have instead begun contemplating a new 90- or 180-day rollover of the interbank and trade credits to allow more time for negotiations. But representatives of some large banks that belong to the advisory committee have also warned that many regional banks may not go along with this.

The new self-assurance--some bankers have even called it ``arrogance``--

that Brazil has begun displaying in its dealings with the IMF and with its creditors nonetheless appears to reflect the government`s perception that its bargaining position has been bolstered by the resumption of domestic growth and its continuing strong trade performance.

Even the drop in world oil prices, a severe blow to the revenues of such other regional debtors as Mexico and Venezuela, has worked in Brazil`s favor. With domestic production expected to cover 74 percent of the demand of 1 million barrels a day by the end of 1986 and with some $800 million saved from lower oil prices, the country`s oil import bill this year is forecast at around $3 billion--compared with $10 billion in 1980.

Similarly, although a drought in Brazil`s agricultural south is damaging crops, officials say the recent sharp rise in world coffee and soybean prices should more than make up for any food production losses that must be covered with imports.

Perhaps most symptomatic, though, is the mood of Sao Paulo, which accounts for half the country`s industrial production. While industry nationwide grew by 7.8 percent last year, output in Sao Paulo jumped by around 13 percent.

``Reality surpassed the dream,`` the economic weekly, Senhor, noted effusively. ``The year that ended was far better than even optimists had predicted.``